Risk Aversion and Expected Utility Basics

An overview of Risk aversion, visualizing gambles, insurance, and Arrow-Pratt measures of risk aversion. A thousand apologies for the terrible audio quality.
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[@anthonycardoso7330]

This video literally helped me more than my entire class trying to understand this information

[@pedrocolangelo5844]

I cannot put in words how much I appreciate professor Burkey's work on KZbin

[@Julie-sm6yg]

Really helpful video, thank you so much! I needed to understand those graphs.

[@johndias631]

I am studying Operation Research and this helped me a lot

[@wmsilvia]

Prepping for a decision science course, this puts some confusing text into great context. Thanks!

[@anupamdas9791]

It cleared my concepts on risk and utility. Thank you very much.

[@mothusilekgetho5310]

Thank you, very helpful, I wasn't getting the rational from my lecturer because she was talking in abstracts and so is the Asset Pricing book we using, so I needed an example that put in the figures for the expected value.

[@sutho73]

Great video, I couldn't find an explanation as good as this one anywhere!

[@sutho73]

Can I also clarify. The Y coordinate or utility vertical on the the graph is derived by the sqrt of the total possible gain?!? I’m trying to workout how you get the height in the Y axis...

[@achutharunr3339]

Super helpful! Thank you for the intuition!

[@mutemupi2829]

Brilliant and very clear explanations. Thank you.

[@user-zl8ou9re7j]

You are my saver, thank you so much!

[@bushrakhan20]

Thank you. Very well explained

[@officialmintt]

Best. Simple. Thank you.

[@keshavkapoor4594]

Great teachers are out there!! and this video was made by one of them.

[@BurkeyAcademy]

😀

[@jwbm1961]

great explanation. Thanks for sharing your knowledge

[@rcolaco]

Very well explained - thankyou!

[@jingzhang3547]

This is amazing! thank you!

[@craigmalcom6294]

brilliant video, well explained

[@masego3152]

thanks extremely helpful and easier to understand! :)

[@petermorgan5645]

Outstanding. Thank you

[@surendrabarsode8959]

Very well explained. Thanks

[@DinaraRaRa]

Amazing, thank you!

[@katlegomehlape8623]

amazing video!

[@nevamind68t23]

Thank you for sharing 👍🏾

[@hen3vz]

good job

[@HyoBear]

Thanks so much...

[@sirajjoy]

Really helpful video, sir

[@henrynguyen6756]

Good video. Thanks!

[@razvanastrenie1455]

EXCELENT EXPLANATION !

[@DeepakKumar-co8kw]

Can you suggest me the measure of risk aversion without wealth indicator?

[@charlottebruce8198]

this really helped for my EE!! thank you!! :)

[@shenren9725]

AHHH, it helps me alot with my math IA!!!

[@janlauterbach8204]

Very helpful video!

[@lancechen3662]

The explanation is much much better than my professor

[@Ecoinspire2023]

Much needed... thanks for the video. Please solve more examples

[@BurkeyAcademy]

I recorded two more videos illustrating designing a contract with Moral Hazard: I added all three videos to a playlist on this topic: kzbin.info/www/bejne/fqOTfGmBZpuDh9U

[@miaya5698]

That was really helpful and thanks

[@anirudhramesh8207]

This was amazing! Thanks.

[@BurkeyAcademy]

Glad you enjoyed it!

[@ObristPlayep]

thanks so much man

[@anisahhakim9837]

Amazingggggg

[@MrHimyhimy]

The last example of being a risk-lover is Walter white's cover-up story in a nutshell

[@danielananta2742]

can we take a risk (become a risk taker) but still take some insurance at the same time?

[@BurkeyAcademy]

Certainly! Instead of fully insuring a risk, which means that in both outcome states (our house burns down or not, we lose our job or not) we can partially insure. An example would be an insurance policy with a deductible (I pay the first $1,000 of loss, and the insurance company picks up the rest), or a policy with co-insurance (I pay 20%, insurance company pays the rest). These can be more efficient and cheaper for both parties when there is an element of moral hazard- e.g. people are less careful when they are fully insured. I always get high deductibles on home and car insurance policies because they are much cheaper, and I am very careful with my home and car anyway!

[@pearsgr]

Where to get the worksheet please ?

[@BurkeyAcademy]

Check the video description- I fixed the link. I apologize for the broken links, but Google broke all of my old file links, and I am having to fix 500 of them. Cheers-

[@dani.lefebvre]

Anyone else at the point were they start questioning wether or not to attend lecture anymore since people on youtube do a better job? Great video!

[@BurkeyAcademy]

Thanks for that- I got into this business because many teachers are unable, or unwilling, to do a great job. I am certainly not perfect, but give it my best shot. Cheers!

[@eimeargavigan4128]

how come you do not use a log function when calculating the utility of a risk averse person?

[@BurkeyAcademy]

Any concave function, which means the person has diminishing marginal utility, will work- so any function where the 2nd derivative is negative. There is no reason why one should choose a log function... but you could if you wanted to.

[@TheViomode]

thank you for this great video, i have a question : I don't inderstande how insurance company can use this if we had the expected value = 70 and the utillity is 7 , and than we can find the 49 with certain , the campany will propose to you to buy the contract with 49 + risque value of 21 $ to get the utility of 7 ? or what ?? explaine to me this point plz , how insurance company work

[@BurkeyAcademy]

There are some deals that the insurance company and the person could make that will leave them both better off (if the insurance company is risk-neutral). Since the person has an expected income of $70, but an expected utility of only 7, which is equivalent to a certain income of $49: Suppose the insurance company guarantees this person an income of $60, demanding a payment of $40 if the person ends up getting the $100, but will provide the person an income of $60 if they end up with 0. This makes the person happier, since they will get a utility of sqrt(60)=7.746. The insurance company can make money from this deal if they do it with hundreds of people, because on average each 100 people will be getting: 30 people getting $0 will cost them 60*100= $1,800 in insurance payments, but the other 70 people will be paying them 70*$40=$2,800. They will profit $1,000 for each 100 people, or $10 each policy they sell. Does that make it clearer?

[@TheViomode]

thank you very much :)

[@FlipHackingRealEstate]

that example at the end is a little dark lol but overall fantastic explanation of risk aversion and utility functions

[@benchapman2925]

this video>

[@ChoBee333]

Hi, I was wondering what 2 factors are important to consider before attempting to measure risk aversion?

[@jabirmhmd23]

I believe companies are risk-loving as well, why they are risk loving?= Limited Liability may be!

[@haroonrafique7106]

Thanks so much! Could you possibly explain why/how the Expected Value of Utility line appears (or maps) on the same M axis for the Curved Certainty Line? The EVU line takes EV inputs. So, when we are looking at $70 on the X axis for the EVU line, this is the EVU= $100x 70% + $0x 30% = $70 value of input. The utility function would appear to be U (EVU) = 0.1*(EVU)

[@maxmustermann6726]

Why can't we just use the second derivative of the functions to see the curvature? Why do we have to divide by the first one and also add a negative sign before? I didn't get that tbh :(

[@BurkeyAcademy]

Good question: No one says you HAVE TO divide by the first derivative and multiply by - to get "some measure of curvature". However, if you want a measure that means something, the second derivative (or other similar measures of curvature) aren't sufficient. We can interpret the Arrow/Pratt number we would get at a particular location on a utility curve as meaning "The person's risk premium for a small, actuarially neutral (i.e., fair) addition of risk". In other words, at what rate do they demand extra money to be willing to accept an infinitesimal amount of additional risk. I highly recommend going to the source here- one of which is Pratt 1964 Econometrica "Risk Aversion in the Small and the Large".

[@talhamember]

Could you do more videos like this please their is nothing out their like this

[@BurkeyAcademy]

Sure! Please send me a specific topic or example problem you'd like to see. I don't teach this kind of material at my University, so giving me examples that might help people helps me! Thanks! You can contact me on Reddit on by finding my email address on my website; see the links in the video description.

[@talhamember]

I definitely will your videos are amazing so simple and concise nothing else like it online. You literally turn the complex into the simple

[@davismotomiya29]

Wealth u(W) = ROOT W, W=10, probability 0.3 to turn to 100, 0.7 to lose everything, wants to avoid risk, how much is he willing to pay? (0,1,2,3)

[@farleysantana8551]

HI. What program do you use?

[@BurkeyAcademy]

For making the graphs? Maple For drawing while I'm talking? OneNote

[@farleysantana8551]

@@BurkeyAcademy thank u

[@dejeneadugna7534]

Very interesting lecture

[@abdulrazzaq9726]

Upload complete videos lecturers of Economics for postgraduate students.

[@BurkeyAcademy]

This request is a bit broad- M.A. and Ph.D. courses for every field? I won't live long enough to accomplish that. ☺ If you have more specific requests, let me know!

[@abdulrazzaq9726]

I mean upload complete videos lecturers of microelectronics, macroeconomic, statistics for Economics, mathematics for Economics, cover whole course for postgraduate students.

[@carolinanunez1727]

:(